Kent State University



|[pic] | |[pic] | |

| |September 5, 2003 | | |

| |

|[pi|PAGE ONE |

|c] | |

| | |

| | |

| | |

| | |

| |In Lean Times, Big Companies |

| |Make a Grab for Market Share |

| |P&G Digs Deep to Gain Ground |

| |On Rival Kimberly-Clark |

| |In Bitter War Over Diapers |

| |By SARAH ELLISON |

| |Staff Reporter of THE WALL STREET JOURNAL |

| |With the economy sagging last summer, Kimberly-Clark Corp., the nation's leading diaper manufacturer, turned to an old tactic for pumping up profits: |

| |It tried to sneak in a 5% price increase by cutting the number of diapers in each pack of its Huggies. |

| |Instead of more profit, though, the company got a hard lesson in how its archrival, Procter & Gamble Co., is aggressively exploiting economic hard |

| |times and pummeling its competitors. |

| |Kimberly-Clark's chief executive officer, Thomas J. Falk, expected U.S. No. 2 P&G to follow up with a similar price increase with its Pampers, as it |

| |had in the past. But as smaller packs of Huggies hit store shelves, P&G dug into its own deep pockets. It splurged on promotional dollars to prod |

| |retailers into slashing prices on its bigger Pampers packs or putting up special displays. And it dramatically boosted the value of its discount |

| |coupons. |

| |P&G sought to highlight the greater number of diapers in its diaper packs by stamping the word "Compare" on them. In some stores, Huggies buyers even |

| |received coupons on their receipts offering $5 off their next diaper purchase -- of Pampers. |

| |To Mr. Falk, the surprising blitzkrieg was "unprecedented and unthinkable." He lamented, "We didn't expect them to take a 15% price reduction on |

| |Pampers for five months." Kimberly-Clark was forced to cancel its price increase before it got off the ground and race to match some of P&G's |

| |promotions, narrowing its profit margins. It ended up falling short of third-quarter earnings expectations, an announcement that caused its stock to |

| |plunge 12% in a day. |

| |Months later, Kimberly-Clark's prospects for sales growth are so sluggish that it recently cut its long-term targets, essentially admitting it has lost|

| |pricing power in the diaper market. |

| |At P&G, CEO A.G. Lafley is unapologetic. "We have a philosophy and a strategy," he says. "When times are tough, you build share." |

| |P&G raised estimates for the seventh time in eight quarters Thursday when it upped its fiscal first-quarter earnings projections. The company's shares |

| |rose 3%, or $2.63, to $91.43, in 4 p.m. New York Stock Exchange composite trading. P&G said broad-based volume and market-share progress led growth. |

| |P&G is just one of many big companies following this harsh playbook. They spent the record boom years restructuring operations, piling up cash and |

| |making acquisitions. Entering the tougher economic times larger and leaner than they had been before, these companies now are using their new muscle to|

| |try to grab business away from their competition. |

| |Consider the auto industry. In past recessions, the Big Three auto companies tended to act in lockstep, offering some generous rebates but for the most|

| |part holding prices steady and simply absorbing drops in volume. They assumed that debt-laden consumers would cut their spending in a downturn, and |

| |that companies just needed to ride it out. |

| |No more. Pressured by imports, General Motors Corp. has relentlessly courted consumers throughout the economy's recent doldrums with generous rebates |

| |and cheap financing, in a brash effort to grab share from Ford Motor Co. and DaimlerChrysler AG. |

| |While those weaker rivals have been forced to follow suit, they have seen their sales and profit margins erode badly. Ford's net income fell 27% in the|

| |second quarter, as escalating consumer incentives failed to stoke auto sales. DaimlerChrysler, hurt by its embattled U.S. arm, said net income fell 90%|

| |in the second quarter. GM has taken some hits too, though it's market share has held up better than its smaller U.S. rivals. |

| |GM has also come under fire for hurting the profitability of the entire sector. But at an industry conference this year, GM CEO Rick Wagoner brushed |

| |off such criticism. "I say it is time to stop whining and play the game," he said. |

| |In prior recessions, grocery stores grew accustomed to raising prices to preserve some of their profits. But this time they have faced an enormous |

| |competitive threat from Wal-Mart Stores Inc., which is seeking to expand its grocery operations, a category in which it barely competed five years ago.|

| |Leaning on its efficient logistics and lower cost structure, Wal-Mart has kept grocery prices low throughout the recession and its aftermath. Other |

| |chains are struggling to differentiate themselves in other ways, but at a heavy cost. Kroger Co. recently issued a profit warning, blaming "competitive|

| |conditions." Albertson's Inc. Thursday reported a 37% drop in second-quarter net profit. Safeway Inc. reported a 48% slide in profits for its fiscal |

| |second quarter, due mostly to shutting down weakly performing stores. |

| |PC Battle |

| |A similar battle is raging in personal computers, where Dell Inc., relying on its lean cost structure, has been steadily slashing prices on its PCs in |

| |an effort to gain more market share from archrival Hewlett-Packard Co. The latest cut came days after H-P reported that its PC unit slipped into the |

| |red in its fiscal third quarter because of steep price-cutting. |

| |An earlier price cut by Dell in late 2000, as an Internet-fueled boom in PC sales faltered, helped push Compaq Computer Corp. into a merger with H-P, |

| |and drove home-computer maker Gateway Inc. toward a new business in consumer electronics. |

| |In the $19 billion global diaper industry, the recession has intensified a longstanding battle between P&G and Kimberly-Clark. P&G commercialized the |

| |disposable diaper when it rolled out Pampers in 1961, but it has tended to lag in innovation and focus most of its efforts on marketing. It has been |

| |the No. 2 player in the U.S. in sales and market share since the mid-1980s. Still, Pampers is P&G's largest global brand, with $5 billion in annual |

| |global sales that account for nearly 12% of P&G's total. |

| |Though it came to the industry later, Kimberly-Clark, which is less than a third the size of P&G, passed P&G in the U.S. and opened up a lead by |

| |consistently investing in technical innovations such as elastic leg openings to help diapers fit better. With $3 billion in global sales, much of that |

| |from the U.S., Huggies accounts for roughly 22% of Kimberly-Clark's annual revenue. |

| |In recent years, competition has stiffened between the two as pricing pressures intensify, generic brands grow in popularity and prospects for new |

| |growth stall. The disposable-diaper industry grew along with the tail end of the baby boom. But these days, with the U.S. birth rate essentially flat |

| |and disposable diapers widely accepted here, prospects for domestic growth are limited. |

| |Mr. Lafley, 56 years old, made Pampers a top priority when he became P&G's CEO in 2000 with a promise to focus on the company's biggest brands, biggest|

| |customers and biggest markets. "For about 15 years, Kimberly-Clark had been having their way with the Procter & Gamble Co.," he concedes. |

| |To take on Kimberly-Clark, P&G installed Deb Henretta, a 42-year-old mother of three, as president of global baby care and started a wholesale revision|

| |of the Pampers brand. P&G invested heavily in upgrading its products, adding features such as stretchy sides and overlapping fasteners that could |

| |adjust the size of diapers. It also moved to develop premium pull-up diapers, or training pants, for toilet-training toddlers. Kimberly-Clark had |

| |dominated that segment, which carries higher prices and profit margins. |

| |Then P&G took its revamped products to a new battleground: the store shelf. As it rolled out its revamped line of Pampers in early 2002, P&G twice |

| |lowered the cost per diaper by increasing the number of diapers in a pack. Kimberly-Clark followed the first price move but balked at the second. Price|

| |reductions already were cutting into its profit margins, and the company was worried that the price gap between high-end diapers and regular diapers |

| |was shrinking too much, according to Dudley Lehman, president of infant and child care for Kimberly-Clark. |

| |Instead, Kimberly-Clark responded with last summer's attempt to raise prices by cutting the number of diapers in each package and trimming the price |

| |per pack by a bit less. That presented P&G with a challenge of its own. Kimberly-Clark's move had pushed the price of a pack of Huggies below $10, |

| |which marketers view as a key psychological threshold in the minds of consumers. |

| |Since P&G couldn't immediately cut the number of diapers in its packages, Mr. Lafley says the company faced a "prisoner's dilemma": leave its per-pack |

| |price higher than Huggies and risk losing customers, or drop its price and eat the difference. "The economy wasn't very good, budgets were pinched, and|

| |diapers are oftentimes one of, if not the most, expensive items in the basket," he says. |

| |But such a moment was what Mr. Lafley had been preparing for. Since taking over P&G, he had been cutting costs, shedding failing units and buying |

| |higher-margin businesses such as the Clairol beauty business in part to allow P&G greater flexibility in competitive fights in low-growth businesses |

| |such as diapers. P&G decided not just to match the price drop, but to keep the same number of diapers in each package for several months. P&G |

| |eventually did cut the number in its packs of Pampers to match what Kimberly-Clark offered, but not until February. |

| |In the face of P&G's countermoves, Kimberly-Clark never got the 5% price increase it wanted in the first place. |

| |P&G also went after a new feature that Kimberly-Clark had added to its Pull-Up diapers: "easy open" sides. They had fine, Velcro-like strips on the |

| |sides, making the training pants easier to remove. Kimberly-Clark unveiled the innovation in mid-October, just as its smaller packages were hitting |

| |shelves, boasting that it was "the most heavily researched innovation in 14 years of Pull-Ups history." The implication was that Huggies had once again|

| |bested Pampers with a technical innovation. |

| |Marketing Assault |

| |But P&G fired back with an unprecedented marketing assault. The company blanketed TV with ads claiming that the new Huggies' Pull-Ups were too easy to |

| |open and kids could pull them off. "You are 2 years old, and it's not that you're a show-off," an announcer said in the ad, as an on-screen toddler ran|

| |through a dinner party waving his training pants around. "It's just those Pull-Ups pull apart like diapers." |

| |From September 2002 to March 2003, P&G spent $25 million advertising its own Easy Ups, according to Competitive Media Reporting, more than three times |

| |the $8 million Kimberly-Clark spent advertising Pull-Ups in the same period. |

| |Kimberly-Clark sued P&G for false advertising and got the ad enjoined for two weeks, but Pampers came back on the air with only a slightly altered |

| |message. Kimberly-Clark says it plans to go back to court this fall to try to get P&G's ads off the air permanently. Meantime, P&G has seen market |

| |share for its new pull-up diapers grow to nearly 20% from zero in February 2002. |

| |Kimberly-Clark's share of the overall diaper market has fallen a point over the past year to 43.7%, while P&G has gained nearly three points to 38.3%, |

| |according to Information Resources Inc. That figure doesn't include sales to Wal-Mart or club stores, where more than half of diapers are purchased, |

| |but industry officials believe the market-shares follow similar trends. |

| |Sales data suggest that since P&G decreased its package size in February, Kimberly-Clark has regained some ground in recent months, but P&G argues that|

| |its momentum is still strong. |

| |P&G hasn't limited its aggressiveness to diapers. When Mr. Lafley was promoted to CEO, the company was often relying on price increases to make its |

| |quarterly earnings targets. But the price gap between its Ivory soap, Tide laundry detergent and Charmin toilet paper and generic versions of the same |

| |products was widening. The growing gap was slowly eroding P&G's market share. |

| |Shortly after he took office in the fall of 2000, Mr. Lafley told worried P&G directors that he planned to evaluate the pricing on P&G's products. |

| |Three years later, he has systematically lowered prices on a host of P&G products, from stalwarts such as Pampers and Bounty to new entries, including |

| |Crest Whitestrips and Swiffer mops. |

| |The company has been able to absorb those cuts, including the damage from the diaper battle, thanks to its diverse portfolio of more-profitable |

| |businesses, such as Olay skin care. Though the spending that helped pump up diaper shares can't continue indefinitely, P&G is betting that by gaining |

| |share it can win more shelf space and support from retailers, inflicting long-term damage on its rivals. |

| |At Kimberly-Clark, Mr. Falk can't afford such measures. His smaller company has many fewer products and no high-end business to match the beauty-care |

| |unit at P&G. While in the quarter ended June 30, P&G reported a 5% rise in profit even after all its spending, Kimberly-Clark's profit fell 1.7% in the|

| |same period. |

| |In another fractious market, P&G watched for years as the smaller Playtex Products Inc. stole share in the tampon market from its own Tampax business, |

| |which it had acquired in 1997 for $1.7 billion. The lack of growth at Tampax had long been an embarrassment for P&G managers. |

| |After taking office, Mr. Lafley urged Tampax managers, who were working on a new Tampax product code-named "Mulan," to punch up the advertising for the|

| |product. After losing share for years, he told them, it was crucial that Tampax reverse its fortunes. "This advertising must be well above normal -- |

| |and high-recalling -- let's get it done now so we're ready to go next spring," Mr. Lafley scribbled in the margins of an April 10, 2001, memo on the |

| |project. |

| |The resulting product, dubbed Tampax Pearl, arrived in stores a year ago. It has a shimmery-plastic applicator with a contoured grip and comes in a |

| |shiny box. As part of the company's $50 million marketing campaign, P&G shipped 75,000 displays for retailers to plunk in store aisles. Pearl was |

| |designed specifically to "reclaim share lost to Playtex," according to advertising strategy documents from P&G's advertising agency, Leo Burnett. |

| |Like Kimberly-Clark, Playtex's results have suffered. It reported a 72% decline in profit for the second quarter. Sales of P&G's Tampax brand grew 9.4%|

| |in the 52 weeks ended July 13, while sales of Playtex tampons fell 7.4%, according to IRI. |

| |In Playtex's case, P&G's attack is even more painful because the company put itself up for sale last year and is staggering under a heavy debt load. |

| |"Consumers must be in the position of trusting manufacturers claims," says Martin Petersen, a Playtex spokesman. "Violation of this trust, especially |

| |by such a prestigious company as P&G, makes their claims of winning in the marketplace hollow indeed." |

| |As with Kimberly-Clark, P&G took an aggressive advertising approach, claiming its Pearl tampons were simply better than Playtex, until Playtex won a |

| |permanent injunction against the campaign earlier this year. A federal jury awarded $2.96 million in damages to Playtex, but Playtex's lawyers argued |

| |that the sales it lost due to P&G's false-advertising claims amounted to $13.3 million. |

| |P&G executives insist they had a good case and are appealing the decision. But they also say that winning a lawsuit is of secondary importance. |

| |Pointing to the increased Tampax sales, Mr. Lafley says, "I'd rather win in the store. I don't really care about the rest of it." |

| |Write to Sarah Ellison at sarah.ellison@1 |

| | |

| |URL for this article: |

| | |

| | |

| | |

| |Hyperlinks in this Article: |

| |(1) mailto:sarah.ellison@ |

| | |

| |Updated September 5, 2003 |

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download